(BBG) Deutsche Bank Sees Merger by Mid-Year If All Else Fails

Deutsche Bank AG executives are worried that they’re down to the last 60 days to turn around their struggling franchise.

On the eve of fourth-quarter results that are likely to reflect its troubles, the bank’s ability to avoid a government-brokered merger with Commerzbank AG could rest on its performance in the first quarter of 2019, according to people briefed on the thinking of its top executives.

A spokesman for Deutsche Bank declined to comment.

“If this is true, the economic situation at Deutsche Bank must be worse than seen by the outside,” said Andreas Plaesier, an analyst with M.M. Warburg. “A merger with Commerzbank at this point doesn’t make sense because it offers few possibilities to achieve client growth.”

Chief Executive Officer Christian Sewing has pleaded for patience with his current plan, which is centered on cost cuts and efforts to stabilize market share, but dramatic images of a police raid in November have compounded the impact of a challenging market. That’s threatening to undermine a return to growth after several failed turnaround attempts. The German government has been intensifying efforts to help fix Deutsche Bank, studying ways to make it easier to merge it with Commerzbank in a bid to add scale and slash expenses.

Although the bank’s largest investors continue to support Sewing, they’re unhappy with the losses they’ve sustained, according to people familiar with the matter. The stock lost more than half of its value last year, before recovering some of those declines this year.

The cost of insuring debt sold by both Deutsche Bank and Commerzbank fell to the lowest levels since November.

While a deal is viewed by some as an imperfect solution, the German government thinks it will be impossible for Sewing to turn around Deutsche Bank before a potential economic slowdown exacerbates the situation, people familiar with the government’s thinking said. Berlin on Wednesday slashed its economic growth forecast for this year to just 1 percent, which would be the weakest pace in six years.

The Finance Ministry declined to comment.

The country still owns a large stake in Commerzbank after a bailout. It doesn’t own a stake in Deutsche Bank, but Finance Minister Olaf Scholz has said repeatedly that he wants strong international banks to support Germany’s export-oriented companies.

Talks between the lender and the government have recently intensified. Representatives of Germany’s largest bank had 23 discussions with officials in Berlin since the new government was formed in March, most of them with Deputy Finance Minister Jorg Kukies. Sewing and supervisory board Chairman Paul Achleitner each had six exchanges, according to a Finance Ministry letter seen by Bloomberg.

Doubling Down

Sewing has ruled out any mergers before 2020, but he’s also said in private that he will have to change his strategy before that if his plan fails. Many officials at Deutsche Bank and the German government favor a merger with Commerzbank as the best option available to Sewing, people familiar with the matter have said.

Analysts polled by the bank now anticipate an eighth consecutive decline in group revenue for the fourth quarter. Chief Financial Officer James von Moltke recently told Bloomberg News that December was a difficult month for the bank.

Still, at least one large shareholder appears ready to double down on the company. Deutsche Bank won a commitment for new investment from Qatar, which already has two vehicles with stakes in the lender, people familiar with the matter have told Bloomberg. The new investment is likely to be made through the the country’s sovereign wealth fund.